Will my pension be reduced?

What will changes to the defined benefit rules mean to pensions?

Will my pension be reduced?

Donna is unsure how the changes to the Centrelink rules regarding defined benefit schemes will affect her Age Pension.

Q. Donna

Like many retirees I received a Centrelink letter last week about the Government’s changes to defined benefit schemes that said they will be capped at 10 percent from 1 January 2016, but it does not really tell you who is affected and why.

I have googled it, and rung Centrelink and my super fund, but I get vague and different answers. I retired from a government job four years ago and was advised to split my super into two (I only had 20 years of super like most women of my age, and I was a single parent and am now a single retiree paying 100 per cent of the bills).

I was told by financial advisers, including one at Centrelink, I would get a Centrelink fortnightly part Age Pension if I did it this way.

A. A defined benefit scheme is where your employer agrees to pay you a pension based on certain contributing factors, rather than the amount invested in superannuation.

These factors vary between funds, but, in general, they are based on:

  • your average salary pre-retirement
  • how long you have worked for your employer
  • your age.

Changes will take place to the way Centrelink addresses the income from such schemes.

Centrelink will cap the deductible amount, also known as the tax-free component, from such schemes to 10 per cent – the deductible amount is the amount that is not assessed as income.

For example, if you receive an income from a defined benefit scheme of $50,000 each year and the tax-free component is $7000, then your assessable income will be $43,000.

Under the new rules, which take effect from 1 January 2016, only an amount equivalent of 10 per cent of the annual income can be excluded from the income test. For example, 10 per cent of $50,000 is $5000, therefore your assessable income is $45,000.

You can find out more at Humanservices.gov.au

I’m sure the information you were given was correct at the time, but as rules change, it is important to keep your financial plan up to date by having regular reviews.





    COMMENTS

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    rookjon
    9th Nov 2015
    11:19am
    For those retirees receiving a ComSuper and part centrelink pension, you can phone the Commonwealth Superannuation Corporation (as it's now called) on 1300 000 277 with your membership no. A staff member will quickly check your no and tell you if your centrelink entitlement is going to change. My present understanding is that most, if not all, old scheme CSS members are unaffected because that pension scheme is "unfunded". This apparently puts it out-of-scope of the January 2016 centrelink revisions.
    bob menzies
    9th Nov 2015
    11:41am
    the same applies to DFRB and DFRDB military pensions - the key is unfunded (technically they paid 5.5% of salary) - so no change for those lucky to have such a pension.
    Red
    9th Nov 2015
    11:41am
    I think the answers to Donna's comment (?questions) ("but it does not really tell you who is affected and why" are: You, (because you have a defined benefit superannuation income) and because the Tax Dept. can change the rules and therefore get more tax money from you!
    Tax is only applicable on any part of income you get which is over $18200.00 p.a. so you may not be affected at all. If you are over 60yrs of age with no part-time paid work - check for exclusions re tax on super income.
    Rae
    9th Nov 2015
    4:44pm
    Red they can't charge tax on non deductible contributions as the tax has already been paid at marginal rates before the worker contributed it. That would be double taxation.

    I'm wondering how long it will be until bank savings will be classed as income when you withdraw it from the account because it is the same sort of thing.
    Hardworker
    9th Nov 2015
    11:48am
    You may be right rookjon and I hope you are. I was in the PSS and retired recently. I rang Commonwealth Superannuation Corporation to try to find out if I would be affected by the changes and they told me that because there was no deductible amount I would not be affected. With the details I needed to give them before actually speaking with them they would have known I was in the PSS. As I find it difficult to understand the scheme anyway I rang a Financial Information Officer at Centrelink and they calculated I would lose about $48 a fortnight from my part Aged Pension. It is no wonder people are confused when they get two opposite answers from those who are supposed to know what they are talking about.
    Peterrj
    10th Nov 2015
    11:29pm
    Hardworker, your advice is totally consistent with the financial advice I have been given over many years .... it's all been totally different, contradictory and often simply wrong!! Never trust one source of financial advice and, in any case, good financial advice is only good till the politicians change the rules once more!!!! Didn't a polly promise not all that long ago that there would be no changes to the Aged Pension??? And I actually believed him, which makes me a grand idiot!!!! I think I will change my name ..... 'Shafted'!
    ray from Bondi
    9th Nov 2015
    12:35pm
    I am on a defined benefit pension and have lost about $20 a fortnight, non of this would be necessary if the government still had the gold mine commonwealth bank and the other Telstra instead of selling our the publics property for who knows what kickback.
    happy
    9th Nov 2015
    12:42pm
    It would be helpful if they stopped changing the rules all the time. I received the letter and have absolutely no idea whether I'll be affected. I guess when I run out of money altogether I'll get a pension. That won't be too much in the future if they don't leave us alone.
    Peterrj
    27th Nov 2015
    8:25am
    happy, you don't sound happy??
    Pass the Ductape
    9th Nov 2015
    2:02pm
    Jeez, You lost me with the first sentence Deb! The rest of your reply was equivalent to an examination question which might have been designed for a university student studying for an accountancy degree. But I have the solution; do nothing and tell Centrelink diddly squat about your finances. That way, when Centrelink brings you to court, and jails you for non-compliance, you tell them - 1. take whatever you have left of your savings - 2. stick you in a cell!

    What with all the mod-cons prisoners receive today -'hey presto' - you're far better off in jail than trying to work with Centrelink's gobbly-gook. .
    Peterrj
    10th Nov 2015
    6:25pm
    Ductape, you clearly have not been in a jail. The best part of being in a jail is walking out the front gates hoping not to go back!
    JATS77
    9th Nov 2015
    3:10pm
    I, too, received that unsettling Centrelink letter which was, indeed, vague and unhelpful. As a former employee of the NSW government and a single retiree, I have a State Super SSS defined benefit superannuation income which is affected by annual Consumer Price Index adjustments [in October each year] and I have been receiving a Centrelink part-pension. The latter has been an important extra because of the concessions (e.g. rates, vehicle rego) attached to it. Now I do not know how I stand, as the recent CPI increased by 2.2% and the Centrelink 'cap' of 10% leaves me wondering how I'll manage from January 1 2016. Is there anyone reading this who is in a position to advise me where to turn for a clearer understanding of this "mess"?
    Rae
    9th Nov 2015
    4:55pm
    Centrelink have no idea what is going on. I tried to get an answer about the non concessional contributions now being classed as income and they had no idea.

    As other non concessional contributions are not classed as income I suspect a court challenge will toss the whole stupid idea out the window eventually.

    You simply can't have two sets of rules about the same thing as I understand it which may be wrong.

    Who understands defined benefit schemes, how they work, how the money was invested or why the returns were so dismal for decades.
    Peterrj
    10th Nov 2015
    11:19pm
    Rae, a Defined Benefit Pension is an undertaking by your State or Commonwealth employer to pay you a defined sum of money per year on your retirement for life regardless of how much employer superannuation has been set aside during the course of your employment. Generally, the Defind Pension payment will greatly exceed the value of your employer's saved superannuation payments. These are generally called 'unfunded pension schemes' meaning that there is no pre-existing pool of cash to pay you the Defind Pension money!!! Many of these lucrative schemes were stopped in the mid 1980's as the Defind Pension scheme was simply 'too good to be true' and they would have sent the Govt broke if they continued to be offered to new public servants!!! The lack of funds put aside to pay the Defined Penion means that current tax payers are now needed to fund the Defined Pension payments!!!! Such State 'pensioners' received this money tax free after 60 and can double dip and still receive the Aged Pension ... hence these unfair changes!!!
    Peterrj
    27th Nov 2015
    8:30am
    Rae, I just re-read my comments above. It's a wonder that you did not give me a couple of upper cuts for some of the comments, which I admit, are not really 100% accurate!!! In conclusion, I agree with you, I don't fully understand that system either!!!
    Paddyschic
    9th Nov 2015
    3:58pm
    It seems that those receiving an age pension are the scourge of society. We cost the country so much in benefits, we selfishly hold on to our homes instead of downsizing and now there is talk of Seniors having an "s" on their number plates to alert other drivers to imminent danger of a senior driving a car. We didn't get half the benefits that families receive now so leave us alone.
    Rae
    9th Nov 2015
    4:40pm
    I am wondering if the tax free component or deductible amount will be classed the same way for other superannuation accounts. If so does it make sense to put post tax savings into super at all?
    jennyb
    9th Nov 2015
    8:33pm
    My understanding is that if you are a member of a defined benefit scheme and receive a pension from that scheme, there is what is called a "Tax-free component". It has nothing to do with actual tax, it's the amount of your pension that is NOT considered by Centrelink when assessing your income for Age Pension purposes. My annual statement from my defined benefit scheme (SSS) said that my "tax-free component" was an amount that equated to 44% of my fortnightly pension. The new changes were further explained in the newsletter that came with my annual statement from my Super Fund. (Kaye, Debbie and co, I am happy to scan this article and send it to you if it will help).
    So under the new rules - a little zinger hidden in the last Federal budget - my understanding is that because this "tax-free component" is now capped at 10%, then 34% more of my fortnightly superannuation pension will considered as income by Centrelink when determining my eligibility for my current part-Age pension. I've done the sums, (could well be wrong,b maths not strong point), but estimate that from January 1 2016, I will lose approximately $110 per fortnight from my current Age Pension.
    And no, I'm not in the high-income, tax-dodging, asset-hiding bracket - far from it. According to the ASFA Retirement Standard, I'm just over their "Modest" standard of living. If I'm right, these changes will take me to just under "Modest". The standards can be found at:
    http://www.superannuation.asn.au/resources/retirement-standard
    jennyb
    11th May 2016
    12:58pm
    No, maths definitely ISN'T my strong point. Actual loss has been $167 per fortnight. So, well under the "Modest" standard of living I have gone - am just hoping nothing goes wrong with house or property as there's nothing in the kitty to fix it. Still, I am not complaining as I know there are others hit by this much worse off than I am. At least I still have access to a small amount of Age Pension and with it, the valuable entitlements that go with it. How are others coping?
    jennyb
    9th Nov 2015
    8:51pm
    To explain further, my SSS defined benefit newsletter article mentioned above gave the following example:
    "Lillian is a single Age Pensioner who is also receiving an SSS pension of $60,000pa which has a 50% "tax-free component" or "deductible amount" (ie $30,000). She has no other income. In determining her Age Pension eligibility CURRENTLY, the whole of the tax-free component is not counted under the Income Test by Centrelink , which means that only $30,000 of her income is assessed. Lillian is currently eligible for a part- Age Pension of nearly $9,500pa (assuming her assets are below the relevant lower assets threshold).
    FROM JANUARY 1, 2016, the tax-free component (deductible amount) is now limited to a maximum of 10% (or $6,000 in Lillian's case), meaning that now $54,000 of her superannuation pension will be counted under the Centrelink income test and as a result, she will no longer receive any Age Pension".
    And no, you cannot assume that if you lose the Age Pension that you will qualify automatically for the Commonwealth Seniors Health card. You will have to apply for it and have your individual situation assessed.
    As I said, a nasty little zinger hidden in the last Federal budget - until now. While our example "Lillian" above may well be able to manage without her part-Age Pension, it's catching many others of us who are well below her income level.
    JATS77
    10th Nov 2015
    7:39am
    Thank you for your contribution jennyb for without it, I'd not have known about the "Lillian newsletter", as it was not included in my mailing; must have been an oversight ... but maybe not! Lillian's income is way above my poor situation and unless others [more informed and skilled retirees and their supporters who are willing to engage with these matters] manage to cause a swell of indignant public opinion (GET UP?), I fear that life will prove an even greater struggle for many retirees like us.
    GregB
    10th Nov 2015
    8:39pm
    As a former State Government employee and I now receive a defined benefits pension. Under the new capping rule my wife and I will lose $5000 per year from our age pension. This will no doubt make things very tight. My concern is the fairness of taking money from pensioners who have adjusted their life to a certain level of income and have no opportunity to make up lost money, such as going back to work. At 75 that is really not an option. We based our lifestyle on our income at the point of retirement, and this included a small amount of age pension. To start taking age pension away from people well after retirement, seems unfair. If such changes need to be made they should be made from some future point and not affect people retrospectively.
    Peterrj
    10th Nov 2015
    10:42pm
    The stats and issues complicated but simply put: if you receive Part Aged Pension and you also received a Defined Pension THEN your eligibility to receive Part Aged Pension needs to be reassessed. So start the process again and this time treat all but 10% of your Defined Pension as relevant income to determine if you will receive any Aged Pension! No doubt this reassessment will reduce your Part Aged Pension or even totally disqualify you from getting any Aged Pension! But that is not the end of the story for those receiving a Dedined Pension. If you are no longer eligible to receive the mythical $1 Part Aged Pension payment then you also lose all Aged Pensioner Benefits!!!! The flow on effect could include: income support payments, Low Income Health Care Card, and aged care fees. Got your attention???? The loss of the Status of being an Aged Pensioner will be financially significant ... such significance will unfold as time goes on!!!! You may notice an increase in Doctor's Fees from Bulk Billed to full Fee, and no discounts for Chemist Prescriptions, Car Registration and utility charges if you are no longer a 'Pensioner'!!! Effectively you may now adopt the status of being a 'wealthy self funded retiree'!!! And no, you don't automatically qualify for the Commonwealth Senior's Health Card. Now think of this, if your Defined Pension payment puts you over the upper threshold limit even by $1 then your cost of living has just jumped more than I can calculate! I am not aware that you can ask that your Defind Pension be reduced by any amount so as to qualify you for the many benefits of being an Aged Pensioner!!!! So much for 'financial planning for retirement!!! And no, these rules will not be reversed!!!!
    JATS77
    11th Nov 2015
    9:32am
    GregP and PeterRJ, both of you have made the points which have been troubling me since the arrival of the Centrelink letter. I think that we all need to be writing to our local MPs and Senators; surely there are are many of us due to be deeply impacted by these January 1 2016 changes and the decision makers only seem to pay attention to vocal voters in large numbers.

    One suggestion made to me [and I have no idea if it is possible] was to consider resuming submission of a Tax Return, ascertain how much money I was over the cut off point and donate that amount to charities [if it did not exceed the donations limit for Tax purposes] which ought to leave an income in the acceptable range to receive a part Age Pension. I wish I knew more about accountancy!
    Peterrj
    11th Nov 2015
    11:32am
    Hi JATS77 write and protest but it won't do you any good. The Govt is broke and there is not enough tax money to pay our Social Service bill. The Govt is cracking down on Disability Pensions otherwise how can we afford to bring in more refugees? This change, the one promised not to change, will save Govt money and that money may also now be diverted to helping the refugees when they arrive in Australia. So think of the greater good it will do for Australia by cutting your Age Pension money.

    In relation to your Tax Return, you can donate as much of your Defind Pension money to charities as you like. However, as the Defind Pension is tax free that kind generous gesture will not reduce your Defined Pension income! May I suggest that you don't do as you have suggested as you may need that money now that your weekly income is about to be reduced significantly.

    But don't take my worked on this, try and get proper advice from your Defined Pension provider (and I bet that they won't give you such advice) so then go to Centrelink and ask them. And try and relax when they look dumbfounded at you when you ask the question!

    This is only the start of the beginning .... More, a whole lot more economic grief, is yet to fall upon the retirees!!!!
    Peterrj
    12th Nov 2015
    12:20pm
    YLC, '... the Government is now targeting superannuation tax breaks amidst concerns that its proposal to increase the GST will no longer pass the Senate.'. It's now starting to warm up!!!!
    jo
    11th Nov 2015
    11:05am
    My husband is 76 and receives a defined benefit from SSS. His non taxable component is 63%. When the new rules come in on Jan 1 our centrelink payment will be reduced by more than $14000 per year ($1100) per month. He worked for the NSW State Gov. For 44 years. He was an average paid employee and this reduction will now put us in the low to modest income range. This is a very poor decision when all his working life we have scrimped and saved to have a reasonable retirement, and definitely not be reliant on our family. We are extremely disappointed with the secretive manner in which this change has been handled.
    Peterrj
    11th Nov 2015
    11:44am
    Dear Jo, I am sympathetic, can I ask are you completely sure that you will lose $14,000 from your Aged Pension money???? Will you still get any Aged Pension money????

    I think in the new formula is fairly simple: Treat the total amount of your Defind Pension less 10% as income and that is then added to any other form of income you have. That will then be your assessible income to determine if you can receive any or Part Aged Pension.

    If any reader knows of any loop holes or if my calculations are wrong then can you let us all know????
    jo
    11th Nov 2015
    2:06pm
    Peter thank you for your comments. Centrelink have given us an estimate how we will be affected. Going from 63% to 10% is the determining factor. Yes we will still receive some age pension. Its long term state gov employees who are severely affected. We have no other income. SSS defined benefit plus centrelink only
    Happy Jack
    20th Nov 2015
    5:49pm
    Well,Well!!!! Here we have the lieberal party govt coming in for the kill on their Crusade against pensioners and Seniors. In view of the fact that these poor unfortunates have reached the end of their working lives and are no longer able to compensate for this ravenous assault on their standard of living, this mob stands condemned. Not a word of this on the airwaves or in the press- just a quiet note from Centrelink. But than, there's no votes in this! so good cop (read Mal ) and bad cop ( read moaning Morrie ) are keeping under the radar. Can they explain why payments into these funds which were made after tax should be subjected to double taxation. What a joke, let their Millionaire mates and themselves ( you can bet they've been socking it away too ) get away with paying bugger all tax on their huge super accounts. Let's look at the record- SENIOR SUPPLEMENT "GONE"! MATURE AGE WORKER OFFSET "GONE"! COMPENSATION FOR THE CARBON TAX "GONE"!!! and that with power costs being jacked up as soon as that "GREAT BIG HUNGRY TAX"!! was abolished. What next from these liars ( remember, no changes to pensions! ) and connivers???
    whatsupdok
    1st Dec 2015
    12:42am
    I'm reading all these comments about something I know nothing about. Seems it would be wonderful if the tax department and centrelink left older people alone to enjoy their retirement. It's hard when your brain shuts down. I just want to be left alone.
    Andy
    11th May 2016
    12:45pm
    In his pre-budget heads-up (02/05/2016) Fairfax economics expert Peter Martin reminded us that there were still many “ghost” measures waiting to be passed by the Senate that would net the Government many billions of $$ should they get re-elected. One walking dead measure that they were able to pass - with the help of the Greens and at the very last minute (22/06/2014) - was “The Social Services Legislation Amendment (Fair and Sustainable Pensions) Bill 2015 ", introduced by minister Morrison. The Bill, with amendments to its 6 schedules, left only that schedule that dealt with the assets test to defined benefit schemes. The other schedules would be dealt with "in due course".

    Yet only the next day (23/06/2014) the Senate passed a new bill that dealt specifically with the income test for pensions derived from defined benefits pensions, “The Social Services Legislation Amendment (Defined Benefit Income Streams) Act 2015". Minister Morrison had found that some beneficiaries of such a scheme, a couple earning $120,000 between them, were drawing a part age pension of $7500 a year. This earned them the title of "fat cat public servants", who had been fortunate enough to "fly under the radar" of the income tests by virtue of an anomaly created in the 2007 Costello budget.

    From now on (no grandfathering here), and excluding the military, who can continue to enjoy the fruits of the anomaly, because of the "unique nature of their service", there will be a cap of 10% placed on the amount of income that can be excluded from the age pension income test. The Police, the Firies and the Ambos have been crying out in vain, "me too", although the Police it seems have been taking considerable advantage of Negative Gearing.

    I was one of those grandfathers who retired in 2008, age 67 and ignorant of the possibility of drawing a part age pension, until a financial adviser pointed out that this was legitimate since the 2007 budget. This allowed me, as a lymphoma sufferer, to take advantage of one special provision of my defined benefits scheme, viz the reversionary super that goes to a remaining spouse, if one takes only 93% of the available super pension. It increases from 67% to 87%. Here was a chance of doing some proper financial planning for my retirement. My spouse is nine years my younger, and is now also retired. I have a daughter struggling with PTSD. I am still alive, but do the maths. I have lost all but $39 pf in part age pension. Ditto for my wife.

    The 2016-17 Budget has now been brought down, and Peter Martin is starting to like the look of it, even though one particular zombie measure remains the unseen elephant in the room, despite the retrospectivity now being applied to other budget measures. How about repealing the unfair 2014 Bill passed in haste at the end of that financial year?

    Andy


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